December 14, 2011

Of the many places Hendry doesn’t want to be long, China is near or at the top of the list. He thinks China could be subject to a 25% (!) decline in GDP over the next five years.

How is that possible?

He draws an interesting analogy: “UK GDP fell 8% in the Great Depression, while US GDP fell 25%.” Inferring, of course, that today’s China is the upstart US to our current “UK peak empire” role.

In what he calls “the great unwinding”, the strongest economies in the world are also – ironically – the most vulnerable.

But that doesn’t mean he’s bullish on the developed world, either. He has an aversion to just about everything.

“It’s checkmate. Everywhere it’s checkmate.”

He believes Italy is insolvent, citing their huge borrowing binge over the last ten years that has only achieved 0% growth.

He loves Japan – as a culture and place to visit – but is especially bearish on several Japanese sectors. He’s long credit default swaps with respect to cyclical, leveraged Japanese businesses. He’s also bearish on Japanese utilities, which have issued tremendous amounts of debt since the Fukushima disaster.

Hendry’s favorite sacred belief – which he’s betting against, of course – is the fact that no one believes the ECB will ever cut rates below 1%.

He’s made bets that he says will deliver a 40-to-1 return if the ECB cuts rates below 1% next year.

The high CPI numbers being reported in the UK and other Western nations are “meaningless”, Hendry says, because in today’s economic environment, it does not translate into wage growth. (In the 1970’s, it did).

Because wage labor is approximately 70% of total business costs, he does not see meaningful inflation without wage inflation.

He’s also down on gold because it is not a contrarian investment today as it was 10 years ago (he had a nice year in 2003 buying gold and gold stocks when nobody wanted them).

The widespread belief among the greatest financial minds today that hyperinflation is inevitable greatly disturbs him.

In the Western world, he sees hyperinflation as a political choice – one that requires the will of the populous. (Forget Zimbabwe, he says – that might as well be Timbuktu. It’s not our culture.)

He sees society’s current mood as “dark” (Tea Party, Occupy Wall Street, and social unrest in Europe to name a few), and believes this makes bailouts and money printing very hard. The only environment that makes hyperinflation possible is “the mother of all depressions” he says.

In keeping with his anticipation of paradox, he quipped that if you believe in hyperinflation, then you should be levered up long on 10 and 30-year Treasuries…because in order for hyperinflation to become a political reality, deflation must arrive first.

Hendry then pulled up a chart of US and Europe non-financial debt to GDP, illustrating that Europe’s debt has been spiraling out of control ever since the formation of the European Union.

Participant nations, he puts it, received initial “ALT-A” rates – nice low German interest rates – for signing on. But the fixed exchange rate that the euro imposes on the peripheral nations started the time bomb ticking.

Hendry, in fact, is very down on fixed exchange rates, and believes the euro and the dollar/renminbi peg are at the heart of global economic insecurity today.

He believes the recent referendum in Greece could be a very significant event, likening it to a 1931 mutiny in England that forced the Brits off the gold standard. He things the Greek referendum could be the trigger to disengage from their fixed exchanged rate (and cited everyone’s lack of anticipation for the referendum as a classic example of irony in finance).

Disclaimer. This blog is not owned, managed or written by Hugh Hendry and is no way affiliated with him. The blog only includes comments and information that is already available in other online public sources. For any questions about the material in this blog, you can contact us at: invnewsfeed@gmail.com

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fund manager at Eclectica Asset Management. He has 18 years' industry experience with Baillie Gifford, CSAM and Odey Asset Management. At Odey he managed a range of funds from $1.0bn of long only European mandates, including the award winning Odey Continental European Fund, to the The Eclectica Fund.

Hugh graduated from Strathclyde University in 1990. He has become prominent in the United Kingdom for his commentary on the financial crisis.Hendry has been referred to as

One of legendary and best investors of Switzerland, Felix Zulauf of Zulauf
Asset Management gave his views on the market in an interview for the
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6 years ago

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